Bidding Systems for Leases in the Outer Continental Shelf

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 206 and 260

RIN 1010-AB93

Bidding Systems for Leases in the Outer Continental Shelf

AGENCY: Minerals Management Service, Interior.

ACTION: Proposed rule.

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SUMMARY: The Minerals Management Service (MMS) proposes an amendment to

change the bidding systems for newly issued leases under the Outer

Continental Shelf Lands Act (OCSLA). Four modifications of the existing

alternative bidding systems are proposed that could lower the minimum

prescribed royalty rate charged on newly issued Federal offshore leases

from 12\1/2\ per centum to a rate greater than zero per centum; allow

operating allowances in determining receipts subject to royalty rate;

suspend or defer royalty for periods, volumes, or values of production;

and extend the functional forms for calculating royalty rates under

variable rate systems to include product prices as well as value and

amount of production with the ability to apply different functional

forms across time periods. The proposed rule does not affect existing

leases.

This proposed rulemaking results from a review of alternative

leasing policies conducted by MMS with constituent input, consistent

with the Vice-President's Reinventing Government initiative. In

particular, this change will grant the Secretary of the Interior

(Secretary) the flexibility to improve the way MMS provides service to

its customers and its ability to manage OCS oil and gas resources for

the benefit of the public.

DATES: Comments must be received or postmarked no later than October

23, 1995 to be considered in this rulemaking.

ADDRESSES: Comments should be mailed or hand-carried to the Department

of the Interior; Minerals Management Service; 381 Elden Street; Mail

Stop 4700; Herndon, Virginia 22070-4817; Attention: Chief, Engineering

and Standards Branch.

FOR FURTHER INFORMATION CONTACT:

Dr. Marshall Rose, Chief, Economic Evaluation Branch, telephone (703)

787-1536.

SUPPLEMENTARY INFORMATION: Under the OCSLA, in section 8(a)(1), several

bidding systems are authorized for new leases. The Secretary may grant

a modification in the royalty rate to less than 12\1/2\ per centum upon

application for existing leases. However, new leases are currently

offered at a lease-specified royalty rate of no less than 12\1/2\ per

centum, and it is for this class of leases that the proposed rule is

applicable.

The OCSLA also provides authority to modify any bidding system

currently authorized by the act if the Secretary determines the

modification to be useful to accomplish the purposes and policies of

the act (section 8(a)(1)).

MMS will consider using this more flexible royalty rate policy on

specific types of new leases, including, but not limited to, those

characterized by high development costs (deepwater leases in water

depths of 200 meters or greater), relinquished tracts with qualifying

wells but uneconomic reserves, or relinquished tracts that received

high bonus bids but no exploration activity. Bidding systems that

reflect a lower royalty than 12\1/2\ per centum are expected to

increase competition for these tracts and, if discoveries are made,

result in greater production in the future.

The proposed regulatory change would initiate actions to allow

modification of the minimum royalty rate from 12\1/2\ per centum of the

production amount or value to an effectively lower rate for all or a

part of the tract's productive life as described in the lease terms

portion of a sale's final notice. This lower rate could be designated

over the life of the lease as a constant or variable measure or emerge

as a result of fulfilling specified conditions (e.g., no royalties due

until production reaches a designated level or a predetermined capital

cost allowance is recovered). Further, the basis for determining the

royalty rate under variable terms is expanded to include resource price

as a potential variable. Thus, a smaller royalty rate could apply

during periods of lower average product prices, and the precise

relationship could vary between periods. This expansion will allow use

of a simple price-royalty rate formula when unit operating costs are

constant and can be estimated with some precision.

This proposed rule is the result of a review of alternate leasing

policies conducted within MMS. MMS published a Federal Register Notice

presenting possible alternate policies and received input from

constituents, consistent with the Vice-President's Reinventing

Government initiative.

The proposed actions will enable MMS to set royalty terms at time

of sale for new leases that will adjust dynamically to changing market

conditions prevalent in the oil and gas industry during exploration,

development, and production. These actions are expected to result in

increased competition for newly offered Federal offshore tracts,

thereby contributing to the assurance of receipt of fair market value

on leased tracts. These actions are also expected to increase the

likelihood that a newly leased tract will be explored and developed. In

sum, this change will grant the Secretary the flexibility to improve

the way MMS provides service to its customers and its ability to manage

OCS oil and gas resources for the benefit of the public.

Author: This document was prepared by Dr. Marshall Rose, Chief,

Economic Revaluation Branch, MMS.

Executive Order (E.O.) 12866

This rule was reviewed under E.O. 12866. The rule was determined to

not be significant under the criteria of E.O. 12866.

Regulatory Flexibility Act

The Department of the Interior (DOI) has determined that this

proposed rule will not have a significant economic effect on a

substantial number of small entities. Any direct effects of this

rulemaking will primarily affect the Outer Continental Shelf (OCS)

lessees and operators--entities that are not, by definition, small due

to the technical complexities and financial resources necessary to

conduct OCS activities. The indirect effect of this rulemaking on small

entities that provide support for

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offshore activities have also been determined to be small.

Paperwork Reduction Act

The information collection requirements contained in those parts of

MMS's regulatory program affected by this rule by this rule have been

approved by OMB under (44 U.S.C. 3501 et seq.). The forms, filing date,

and approved OMB clearance numbers are identified in 30 CFR 210.10 and

30 CFR 216.10.

Takings Implication Assessment

The DOI certifies that this proposed rule does not represent a

governmental action capable of interference with constitutionally

protected property rights. A Takings Implication Assessment prepared

pursuant to E.O. 12630, Government Action and Interference with

Constitutionally Protected Property Rights, is not required.

E.O. 12778

The DOI has certified to OMB that this proposed rule meets the

applicable civil justice reform standards provided in Sections 2(a) and

2(b)(2) of E.O. 12778.

National Environmental Policy Act

The National Environmental Policy Act (NEPA) compliance for the

proposed rule is covered by DOI procedures for implementing NEPA (516

DM2, Appendix 1.10). In accordance with those procedures, MMS will

examine the potential environmental effects of the proposed rule during

NEPA review for each lease sale. This is appropriate because the

potential environmental effects of the rule depend largely on how it is

applied, and decisions on application would be made on a sale-by-sale

basis.

List of Subjects

30 CFR Part 206

Coal, Continental shelf, Geothermal energy, Government contracts,

Indian lands, Mineral royalties, Natural gas, Petroleum, Public lands--

mineral resources, Reporting and recordkeeping requirements.

30 CFR Part 260

Continental shelf, Government contracts, Mineral royalties, Oil and

gas exploration, Public lands--mineral resources.

Dated: May 12, 1995.

Bob Armstrong,

Assistant Secretary, Land and Minerals Management.

For the reasons set forth in the preamble, 30 CFR parts 206 and 260

are proposed to be amended as follows:

PART 206--PRODUCT VALUATION

1. The authority citation for part 206 is revised to read as

follows:

Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 396a et

seq., 2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 1001 et

seq., 1701 et seq.; 31 U.S.C. 9701; 43 U.S.C. 1301 se seq., 1331 et

seq., and 1801 et seq.

2. Section 206.106 of subpart C is added to read as follows:

Sec. 206.106 Operating allowances.

Notwithstanding any other provisions in these regulations, an

operating allowance may be used for the purpose of computing royalty

obligations when provided for in the notice of an Outer Continental

Shelf (OCS) lease sale. The allowance amount or formula shall be as

specified in the notice of an OCS lease sale and in the lease

agreement.

3. Section 206.160 of subpart D is added to read as follows:

Sec. 206.160 Operating allowances.

Notwithstanding any other provisions in these regulations, an

operating allowance may be used for the purpose of computing royalty

obligations when provided for in the notice of an OCS lease sale. The

allowance amount or formula shall be as specified in the notice of an

OCS lease sale and in the lease agreement.

PART 260--OUTER CONTINENTAL SHELF OIL AND GAS LEASING

1. The authority citation for part 260 is revised to read as

follows:

Authority: 43 U.S.C. 1331 and 1337.

2. Section 260.110 of subpart B is amended to revise paragraphs

(a)(1)(iii), (2)(iii), (3)(i)(C)(4), and (iii) and to add new

paragraphs (a) (5) and (6) to read as follows:

Sec. 260.110 Bidding systems.

(a) * * *

(1) * * *

(iii) The annual rental to be paid by the highest responsible

qualified bidder and any amounts creditable against future royalties

shall be the amount specified in the notice of an OCS lease sale

published in the Federal Register.

* * * * *

(2) * * *

(iii) Payment amounts shall be as specified in paragraph

(a)(1)(iii) of this section.

* * * * *

(3) * * *

(i) * * *

(C) * * *

(4) The production period and inflation factor for purposes of

determining value or amount of production shall be stated in the notice

of an OCS lease sale that is published in the Federal Register. The

procedures for making the inflation adjustment shall be stated in the

notice of an OCS lease sale published in the Federal Register.

* * * * *

(iii) Payment amounts shall be as specified in paragraph

(a)(1)(iii) of this section.

* * * * *

(5) Cash bonus bid with a variable royalty rate or rates during one

or more production periods in amount or value of the production saved,

removed or sold, and an annual rental. The royalties may be suspended

or deferred for a period, volume, or value of production.

(i) The royalty rate or rates to be paid by the highest responsible

qualified bidder may be less than 12\1/2\ per centum, but greater than

zero percentum, at the beginning of the lease period in the amount or

value of production saved, removed or sold. The applicable royalty

rate(s) and suspension or deferral magnitudes or formulas shall be

specified in the notice of an OCS lease sale published in the Federal

Register.

(ii) Amount and payment of cash bonus under procedure shall be as

specified in paragraph (a)(1)(ii) of this section.

(iii) Payment amounts shall be as specified in paragraph

(a)(1)(iii) of this section.

(6) Cash bonus bid with a variable royalty rate or rates during one

or more production periods in amount or value of the production saved,

removed or sold, and an annual rental. The royalties may be suspended

or deferred for a period, volume, or value of production.

(i) The royalty rate or rates to be paid by the highest responsible

qualified bidder shall be a percentage of the amount or value of the

production saved, removed or sold. When the value of production is

used, by unit or in aggregate, the basis for the prices to be applied

shall be specified in the notice of an OCS lease sale published in the

Federal Register.

(A) The royalty rate shall be calculated by utilizing a formula or

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schedule, which relates the royalty rate established thereby to the

adjusted amount or indexed value of the oil and gas produced during

designated production periods. The description of the formula or

schedule shall include the relationship between adjusted or actual

amount, indexed value, or indexed price of production, and the royalty

rate, with a stipulation of the lowest royalty rate and highest royalty

rate. The royalty rate formula or schedule and the suspension or

deferral magnitudes or formulas shall be included in the lease document

as executed.

(B) The royalty rate formula or schedule and the suspension or

deferral magnitudes or formulas shall be specified in the notice of an

OCS lease sale published in the Federal Register.

(C) Royalty payment calculation.

(1) The royalty rate utilized in the calculation of royalty

payments is based on an adjusted or indexed value, amount, or indexed

price of production and is established through application of a formula

or schedule during one or more designated production periods.

(2) The adjusted indexed value or indexed price of production shall

be determined by applying an inflation factor to the actual indexed

value or indexed price of production.

(3) The established royalty rate is applied to the actual value of

production which results in the determination of amount in dollars to

be paid to the United States by the person awarded the lease, or the

amount of royalty oil and gas to be taken in kind by the United States.

(4) The production period, inflation factor for purposes of

determining value or amount of production, and procedures for making

the inflation adjustment shall be stated in the notice of an OCS lease

sale that is published in the Federal Register.

(ii) Amount and payment of cash bonus under procedure shall be as

specified in paragraph (a)(1)(ii) of this section.

(iii) Payment amounts shall be as specified in paragraph

(a)(1)(iii) of this section.

* * * * *

[FR Doc. 95-20873 Filed 8-22-95; 8:45 am]

BILLING CODE 4310-MR-M